This analysis delves into the investment potential of NLY-I, a preferred share issued by Annaly Capital Management, highlighting its attractive yield and perceived stability. The current market conditions suggest a promising outlook for this particular security, especially when compared to its counterparts. The investment strategy centers on capturing a robust dividend income stream while anticipating a slight capital appreciation.
Annaly Capital Management, a prominent mortgage real estate investment trust (REIT), offers several series of preferred shares. Among these, NLY-I has garnered particular attention due to recent market movements. Historically, NLY-I has frequently traded just above target entry points, limiting opportunities for bullish recommendations. However, a recent dip in its market price has created an opportune moment for investors.
Currently, NLY-I shares are trading at approximately $25.01. While the annualized yield-to-call might appear modest if the shares were to be redeemed immediately, the more compelling aspect is the stripped yield, which stands at around 8.94%. This yield would be realized if the shares remain outstanding for an extended period. It is noteworthy that Annaly Capital Management has had ample opportunities to redeem these shares since they became callable and switched to a floating rate on June 30, 2024, yet they have not done so. This aligns with the behavior observed for NLY-F, another floating-rate preferred share from Annaly, which has been floating for over three years without being called.
A comparative analysis with NLY-F reveals NLY-I as the more appealing option. NLY-I trades at a lower price and benefits from a more advantageous dividend calculation methodology. Specifically, NLY-I's dividends are calculated using the actual number of days in a dividend period divided by a 360-day year, effectively yielding approximately 101.4% of the expected annual dividend accrual. This nuanced calculation leads to slightly higher dividend payouts for NLY-I, making it a more attractive proposition despite NLY-F's marginally higher floating spread.
The current valuation of NLY-I suggests a slightly positive yield-to-call, a factor that, combined with its discount to target prices, reinforces a bullish stance. The investment approach involves collecting the attractive dividend yield while anticipating a modest increase in the stripped price, potentially ranging from 0.5% to 1.5%. This strategy is underpinned by the historical resilience of NLY-I's price, which has rarely fallen below $25 since it began floating. This price point acts as a strong support level, largely due to the interest from retail investors who prioritize high-yielding shares trading below $25.
Annaly Capital Management specializes in agency mortgage-backed securities, which are known for their high credit quality due to government backing. This focus contributes to the low-risk profile of its preferred shares. While some investors may be drawn to the common shares for their high dividend yields and seemingly low price-to-earnings multiples, a deeper understanding of mortgage REIT accounting reveals the preferred shares often represent a more straightforward investment for many. The author has demonstrated confidence in NLY-I by making a substantial personal investment, underscoring the conviction in its stable valuation and attractive yield.
In summary, NLY-I presents an attractive investment case with a high dividend yield and a robust price floor. While minor price fluctuations are always possible, the historical trading patterns and intrinsic value suggest that significant downside is unlikely. The potential for modest capital appreciation, combined with a consistent dividend stream approaching 9%, makes NLY-I a compelling choice for investors seeking stable income and limited risk. The author's considerable personal investment in NLY-I further solidifies this optimistic outlook.
